a. If you are a LaPlace decision maker, which option would you choose? b. If you are a Hurwicz decision maker, which option would you choose with α = 0.2? c. Using a minimax regret approach, which option would you choose? d. Using the same probabilities of 0.35, 0.3, and 0.35 for possible interest levels 1, 2, 3 respectively, which decision alternative will minimise the expected cost? What is the expected annual cost associated with that recommendation? e. What is the most the firm should be willing to pay to obtain further (perfect) information (EVPI)?
Question 1
Given the following payoff table with the profits ($m), a firm might expect alternative investments (A, B, C) under different levels of interest rate.
|
payoffs as profits |
states of nature |
||
|
decision alternatives |
1(5%) |
2(7%) |
3(9%) |
|
A |
14 |
22 |
6 |
|
B |
19 |
18 |
11 |
|
C |
12 |
17 |
15 |
Assume now that the pay offs are costs answer the following:
a. If you are a LaPlace decision maker, which option would you choose?
b. If you are a Hurwicz decision maker, which option would you choose with α = 0.2?
c. Using a minimax regret approach, which option would you choose?
d. Using the same probabilities of 0.35, 0.3, and 0.35 for possible interest levels 1, 2, 3 respectively, which decision alternative will minimise the expected cost? What is the expected annual cost associated with that recommendation?
e. What is the most the firm should be willing to pay to obtain further (perfect) information (EVPI)?
f. Use the alternative method to verify EVPI
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